In this article, we will take a detailed look at Analyst Recommends 10 Best Stocks to Diversify Your Portfolio
Venu Krishna, Head of U.S. Equity Strategy & Global Equity Linked Strategies at Barclays, recently shared a basket of stocks he recommends offsetting the risks that come from market concentration in big tech stocks. In an interview with CNBC, Krishna emphasized that he remains inclined towards big tech stocks, but the important question he addressed is which stocks offer more value outside of the tech sector in the long term.
Krishna’s methodology to find some of the best stocks outside of the tech sector is simple: find out at what “core fundamental” metrics big tech stocks are “excelling” at and then “try to come close to that and create a portfolio which can give us that kind of exposure.” Through this methodology, Krishna says, he came up with a well-diversified portfolio of stocks that could act as a “hedge” against market concertation in big tech.
Krishna said he applied “liquidity filters” on the whole market to remove a “bunch of companies” and narrow down to stocks with strong growth and FCF multiples.
Despite him pointing out the concentration of gains problem, Venu Krishna believes the rise of big tech stocks is a “healthy trend” and some of the gains are now bifurcating to other sectors, too.
However Krishna said that over the past 18 months his portfolio of stocks has lagged behind the Big Tech, but outperformed equal-weighted S&P 500 and market cap-weighted S&P 500.
For this article, we took a look at Krishna’s latest basket of stocks to offset concentration in big tech risks and picked 10 stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Photo by Mohamed Hadji on Unsplash
10. PulteGroup Inc (NYSE:PHM)
Number of Hedge Fund Investors: 39
Home construction company PulteGroup Inc (NYSE:PHM) is one of the stocks Venu Krishna, Barclays head of U.S. equity, is recommending to offset the tech concentration risk. PulteGroup Inc (NYSE:PHM) shares have gained about 57% over the past one year. The stock recently jumped following a broader optimism in the market that a lower-than-expected inflation recorded last month could result in a decrease in mortgage rates. PulteGroup Inc’s (NYSE:PHM) Q1 results impressed the Wall Street, as revenue jumped about 10% in the quarter on a YoY basis despite headwinds in the industry. Homebuilding gross margins in the quarter jumped 50bps to 29.6% even after a decline in sale prices. PulteGroup Inc (NYSE:PHM) is also seeing a rebound in the market. Net orders in the quarter rose 14% to 8,379 while cancellations dropped to 10% from 13%. PulteGroup Inc’s (NYSE:PHM) backlog is now worth about $8.3 billion, up about 3% from last year. The company has also increased guidance for gross margins. Here what the management said during the latest earnings call:
Based on Q1 sign-ups and the composition of our backlog, we expect the geographic mix of closings to be more balanced as we move through the remainder of the year. That being said, we’re raising our gross margin guide for the remainder of ’24. We had previously guided to quarterly gross margins of 28% to 28.5%, but we now expect gross margins in the second quarter to be approximately 29.2%. Based on current backlog, we would expect gross margins for our third and fourth quarters to be approximately 29%, but we still have homes to sell and close, so demand conditions over the coming months will impact the results we ultimately report. Beyond buyer demand and near-term pricing dynamics, the gross margin guide for the remainder of ’24 also reflects expected changes in the geographic mix of homes we expect to close.
9. Ulta Beauty Inc (NASDAQ:ULTA)
Number of Hedge Fund Investors: 52
Barclays in a latest report pitched Ulta Beauty Inc (NASDAQ:ULTA) as a stock to diversify your portfolios in a concentrated market. Ulta Beauty Inc (NASDAQ:ULTA) in May posted Q1 results. Adjusted EPS in the quarter came in at $6.47 per share, surpassing estimates by $0.19. Revenue in the period jumped 3.8% year over year to $2.7 billion, missing estimates by $30 million. Comparable sales in the period jumped 1.6%. Ulta Beauty Inc (NASDAQ:ULTA) is operating in the lucrative beauty industry that has secular growth catalysts. Ulta bulls believe Ulta Beauty Inc’s (NASDAQ:ULTA) loyalty program and its products offered for a variety of budget ranges give it an edge over competitors.
During the latest earnings call Ulta Beauty Inc’s (NASDAQ:ULTA) management talked about its loyalty program and memberships growth:
“Our world class loyalty program expanded again this quarter with the retention of our most valuable members remains very strong. We ended the quarter with 43.6 million Ulta Beauty rewards members, 6% higher than last year, primarily driven by member retention. Additionally, we continued to acquire new members and reengage lapsed members. Targeted marketing efforts are elevating more members to our platinum and diamond tiers, and exclusive promotions, point accelerators and personalized contents are driving engagement and retention of these valuable members. Our new store portfolio continues to perform well.
During the quarter, we opened 12 stores, seven more than last year, and their performance exceeded our expectations. Our associate retention has improved across stores, distribution centers and our corporate teams, and we are on track to complete critical elements of our transformational agenda this year, giving us a stronger foundation for future growth.”
Read the full earnings call transcript here.
Ulta Beauty Inc (NASDAQ:ULTA) is expanding in Mexico via its partnership with Grupo Axo. Analysts believe after testing the Mexican market, Ulta Beauty Inc (NASDAQ:ULTA) could mull expansion in different Latin American markets where Grupo Axo already has a strong footprint.
Average analyst price target set by Wall Street for Ulta is $488, which presents a 25% upside potential from the current levels. Given analysts expect Ulta Beauty Inc’s (NASDAQ:ULTA) earnings to grow 9.90% next year, Ulta’s forward P/E ratio of 15 makes the stock attractively valued.
8. Chipotle Mexican Grill, Inc. (NYSE:CMG)
Number of Hedge Fund Investors: 60
Chipotle is one of the stocks Barclays analyst Venu Krishna believes could offset the tech concentration risks.
In April, Chipotle Mexican Grill Inc (NYSE:CMG) posted strong Q1 results, which showed revenue in the period jumped by 13.9% on a YoY basis, beating estimates by $30 million. Comparable sales in the quarter increased by 7%. For the full year, Chipotle Mexican Grill Inc (NYSE:CMG) expects its comp sales to grow in the mid to high-single digit range. Chipotle Mexican Grill Inc (NYSE:CMG) has been steadily increasing its footprint over the past several years. Back in 2007, the company had just 704 stores. This figure now stands at 3437. One of the biggest signs of Chipotle Mexican Grill Inc’s (NYSE:CMG) strengths is its rising margins, even when the restaurant industry is reeling from high labor costs and squeezing margins. Chipotle Mexican Grill Inc’s (NYSE:CMG) current net margin of 12.45% is the highest it has been in the past decade.
Chipotle Mexican Grill Inc (NYSE:CMG) trades at 47X 2025 EPS estimate of $66.92 set by Wall Street analysts. This P/E is much higher than the industry of 16. Chipotle Mexican Grill Inc (NYSE:CMG) is expected to see revenue growth of just 13-15% per year over the next 3 years, while its EPS growth is expected to come in between 3% to 20%. Analysts expect the American consumer to remain prudent in spending amid higher for longer interest rate scenario and dwindling savings. Therefore, for investors looking for high-growth stock appreciation names, Chipotle Mexican Grill Inc (NYSE:CMG) might not be the ideal choice.
Average analyst estimate for Chipotle Mexican Grill Inc (NYSE:CMG) is $3244.77, which presents just 3% upside potential from the current levels. That means the Wall Street believes the stock has reached its potential and based on current catalysts and growth trajectory it does not have any room to grow significantly.
Rowan Street Capital stated the following regarding Chipotle Mexican Grill, Inc. (NYSE:CMG) in its first quarter 2024 investor letter:
“The best investment ideas are simple. We have previously written about Chipotle Mexican Grill, Inc. (NYSE:CMG). It turned out that this was our best investment idea since starting the fund. The stock is up 10x since we first invested at the end of 2017 (~47% annualized). Sounds absolutely incredible, except that your managers sold CMG back in 2018 (thinking that the stock had gotten ahead of itself), and proudly booked an 85% profit in 6 months, patting ourselves in the back. Interestingly, when we wrote about this in our 2019 letter, describing our big mistake to sell, the stock still went up +270% since that letter, delivering an impressive 30% annual return. This is an incredibly important point! You do not get many Chipotles in your investing career. Companies like these are super rare and the opportunity to buy them at an attractive price (which we got in 2017) is even rarer. Booking a quick profit, paying the capital gains tax and thinking that you will find another CMG to invest your proceeds into is usually delusional.
Along with our personal investment case of CMG, let us compare that to the experience that Bill Ackman had with the same investment. He is a famous hedge fund manager that we greatly admire, who has achieved an incredible track record in the past 20 years running Pershing Square. Bill Ackman has owned the restaurant stock since the third quarter of 2016 at an initial cost basis of about $411 per share (our cost basis was $289). Originally, Mr. Ackman bought 2.88 million shares. He was wise to hold on to CMG stock and it still is the top position in his fund (18% weight). But, if you follow his 13F filings, which are the public filings disclosing large investment manager’s holdings of publicly traded securities, he kept trimming his position as the stock went up. We calculated that if he just sat on his original 2.88 million shares and didn’t sell a share, his position would be worth $8.8 billion today. This would represent ~50% of his entire firms’ assets under management (AUM). But he only has $1.8 billion invested in CMG as of Q1 2024. As Charlie Munger said: ““The first rule of compounding is to never interrupt it unnecessarily.”…” (Click here to read the full text)
7. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)
Number of Hedge Fund Investors: 62
Barclays head of US Equity Strategy Venu Krishna thinks Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is one of the best stocks to offset the concentration in the market and to diversify your portfolio. Last month Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) posted solid Q1 results. The Boston-based biopharma company saw a 56% rise in adjusted EPS in the quarter on a YoY basis. Adjusted net income in the period came in at $1.24 billion, versus $794 million reported in the prior-year quarter. One of the biggest growth catalysts for the stock is Vanzacaftor, its treatment for cystic fibrosis patients. Early data shows the drug’s ability to improve lung function and sweat chloride levels. Analysts are also closely watching Vertex Pharmaceuticals Incorporated’s (NASDAQ:VRTX) pain management drug Suzetrigine and kidney disease drug Inaxaplin, both in late-stage development. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is also working on its type 1 diabetes treatment with VX-880, a smell cellderived, fully-differentiated islet cell therapy. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) made headlines in April after it entered into a deal to acquire Alpine Immune Sciences, Inc. which makes protein-based immunotherapies, for $4.9 billion in cash
In 2024, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is expecting revenue in the range of $10.55 billion to $10.75 billion. The midpoint of this range would represent an 8% revenue growth on a YoY basis. Wall Street expects Vertex Pharmaceuticals Incorporated’s (NASDAQ:VRTX) EPS to rise 12% from last year, while 2025 and 2026 earnings growth are expected to come in at 8% and 12%, respectively. Based on strong growth catalyst and a healthy pipeline, the stock’s forward P/E of 29 is not outlandishly high and makes Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) a smart choice for long-term investors.
Aristotle Atlantic Core Equity Strategy stated the following regarding Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) in its fourth quarter 2023 investor letter:
“Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) develops drugs for treating cystic fibrosis, cancer, inflammatory bowel, autoimmune disease and neurological disorders. The biotechnology company has four commercial drugs used to treat cystic fibrosis. Vertex has other drugs in development, including additional cystic fibrosis treatments and medications addressing sickle cell disease, beta thalassemia, alpha-1 antitrypsin deficiency and pain.
Vertex is the global leader in treating cystic fibrosis and has additionally built a robust pipeline in several therapeutic areas. Late-stage studies in acute and neuropathic pain are expected to be another catalyst for the company. We believe Vertex’s valuation is attractive and at a discount relative to their 5-year historical average. Additionally, the company is well capitalized, with roughly $12.5 billion in net cash on its balance sheet.”
6. TJX Companies Inc (NYSE:TJX)
Number of Hedge Fund Investors: 63
Barclays believes TJX Companies Inc (NYSE:TJX) is one of the stocks that can be a good choice for investors looking to diversify their portfolios and hedge risks in a concentrated market. In May, TJX Companies Inc (NYSE:TJX) posted strong fiscal Q1’2025 results that show TJX is benefitting from the current inflationary environment. TJX Companies Inc (NYSE:TJX) also raised the full-year EPS guidance to $4.03 to $4.09 vs. the prior guide of $3.94 to $4.02. The company expects comp store sales to grow by 2 to 3% and pre-tax profit margins of 11 to 11.1% (vs. the prior guide of 10.9% to 11%).
TJX Companies Inc (NYSE:TJX) continues to shine despite the rising inflation as analysts believe the off-price retailer can survive (and even thrive) because consumers prefer discounted stores when times are tough. During the first quarter, TJX Companies Inc’s (NYSE:TJX) HomeGoods business saw comparable-store sales jump 4%. Overall, TJX’s comp sales jumped 3% in the first quarter, coming in at the higher end of the management guidance. Analyst expects fiscal Q2 to be better than the previous quarter as traffic is estimated to increase amid summer.
Wall Street estimates TJX Companies Inc (NYSE:TJX) earnings to grow 10% in the next year while revenue growth is expected at 5.5%. The stock is trading at 24 times its forward earnings, which isn’t outlandishly high given the stock’s long-term secular growth catalysts.
Madison Investments U.S. Equity Strategy stated the following regarding The TJX Companies, Inc. (NYSE:TJX) in its fourth quarter 2023 investor letter:
“Whether it’s performance by market capitalization, sectors, or any other factor, stock markets are intrinsically cyclical. Some cycles are long-term, taking decades to unfold, and some are short-term, lasting months, weeks, or even days. Many are medium in length, lasting two, three, or several years. Most cycles occur because a trend often creates the seeds of its own reversal. We at Madison Investments are certain that market cycles will occur, but it doesn’t mean we can predict their timing or magnitude. We don’t think we can. This is perhaps a major difference between us and many other investors. Most investors believe it’s their job to time market cycles despite overwhelming evidence that it’s nearly impossible to do so with enough accuracy to make such an effort profitable over long periods. We avoid making calls about market cycles and spend zero minutes thinking about them, not because we don’t think they can be important, but because we think they’re inherently unpredictable in duration.
This mentality of our team is generally true for other kinds of cycles, such as macroeconomic, industry, or company-specific, but is a bit more nuanced for those. We make no explicit prediction about cycles on which we base a buy or sell decision. Still, we are acutely aware of the various cyclical forces at work, and depending on whether we think we have the ability to assess the length or intensity of such, we may incorporate them to various degrees.
Let’s use a few examples to illustrate our point. We’ve been invested in off-price retailer The TJX Companies, Inc. (NYSE:TJX) for just under ten years, having invested in 2014 in our Large Cap strategy. TJX is one of the most recession-resistant companies we own due to its perennial value proposition to customers; customers always like to save money, especially when economic times get tough. As a result, the company has had an exceedingly steady revenue and earning profile over the past several decades…” (Click here to read the full text)
5. Eaton Corporation PLC (NYSE:ETN)
Number of Hedge Fund Investors: 85
Barclays’ analyst Venu Krishna added Eaton in his list of stocks to offset the tech concentration risk.
As more and more companies deploy data centers to power their AI software, the demand for sustainable power solutions is rising, helping company like Eaton Corp Plc (NYSE:ETN). Bank of America recently said in a note that data centers, manufacturing and AI would cause demand growth from an “already-tight electrical grid.” BofA analysts believe solar and wind energy cannot meet this growing appetite and investors are currently incorporating energy sources that might not be there in the future. To profit from this growing energy demand, BofA recommended some stocks, and Eaton Corp Plc (NYSE:ETN) was one of them. During the first quarter, Eaton’s backlog jumped 20% year over year, driven by Aerospace and Electrical segments.
However, Eaton’s valuations has sparked concerns among analysts recently. The stock’s forward P/E is 34.25, much higher than the industry average of 20.1. The stock has gained about 67% over the past one year. The stock is trading at 30X FY24 consensus EPS estimate of $10.50 and 28x FY25 EPS estimate of $11.70. This is much higher than the stock’s 5-year average forward P/E of 22.32x. While Wall Street expects Eaton Corp Plc (NYSE:ETN) earnings to grow 10% next year, the stock price growth could remain capped given the already strong bull run the company saw.
Carillon Eagle Growth & Income Fund stated the following regarding Eaton Corporation plc (NYSE:ETN) in its first quarter 2024 investor letter:
“Eaton Corporation plc (NYSE:ETN) traded higher after announcing better than expected quarterly results as well as providing guidance that was ahead of expectations for the fiscal year. The electrical power equipment company also announced a proactive multi-year restructuring program, enabling Eaton to continue growing while also reducing costs.”
4. Oracle Corp (NYSE:ORCL)
Number of Hedge Fund Investors: 96
Barclays’ analyst Venu Krishna added Oracle in his list of stocks to offset the tech concentration risk. Oracle Corporation (NYSE:ORCL) earlier this month posted weak fiscal Q4 results, but the stock remained steady after the company said it signed multiple AI deals with leading horses in the industry. Oracle Corporation (NYSE:ORCL) said it reached a deal with OpenAI and Microsoft to extend Azure Al platform to Oracle Cloud Infrastructure (OCI) to provide additional capacity for OpenAl. Oracle also revealed a partnership with Google after which Google Cloud will offer Oracle Cloud Infrastructure database services and high-speed network interconnect.
Despite the weak fiscal Q4 results, Oracle’s Cloud business was strong. Cloud infrastructure (IaaS) revenue jumped 42% year over year. For fiscal first quarter, Oracle Corporation (NYSE:ORCL) expects its revenue to rise by 6% to 8% in constant currency, while adjusted EPS growth is expected in the range of 11% and 15%. One of the metrics in Oracle’s Q4 report that impressed the Street was Remaining Performance Obligations (RPOs), which surged 44% YoY in the period. Management expects 39% of this amount to come in the next twelve months. Oracle’s Cloud is exposed to the IaaS market, which is projected to grow to $738.11 billion by 2032, according to some estimates. Oracle Corporation (NYSE:ORCL) management said the company is building data centers and analysts believe the company’s automated OCI services will grow amid rising demand. Given Oracle’s partnerships with major AI players and its dominance in the niche OCI market, it’s forward P/E ratio of 22.03 looks attractive when compared to peers.
Madison Sustainable Equity Fund stated the following regarding Oracle Corporation (NYSE:ORCL) in its fourth quarter 2023 investor letter:
“Oracle Corporation (NYSE:ORCL) reported a disappointing second quarter due to supply constraints. Cloud revenue was below expectations as Oracle made planning decisions to accommodate some large-scale Oracle Cloud Infrastructure (OCI) clients that take longer to bring online. We continue to believe that Oracle has a unique position in Generative AI workloads and continue to like its position and strategy.”
3. Netflix Inc (NASDAQ:NFLX)
Number of Hedge Fund Investors: 107
Barclays recommends Netflix Inc (NASDAQ:NFLX) as a stock to offset risks in the concentrated market where most of the gains are coming from AI stocks. Barclays isn’t alone. Evercore ISI recently said in a note that Netflix Inc (NASDAQ:NFLX) is in “the strongest position financially, fundamentally and competitively that we have ever seen.” Evercore reiterated an Outperform rating on the stock and increased its price target to $700 from $650.
Sensing major threats amid rising competition in the market from Disney Plus, Peacock (CMCSA), Max. Amazon and YouTube, Netflix Inc (NASDAQ:NFLX) has fired all engines and is using a multi-pronged approach to thrive. Netflix Inc (NASDAQ:NFLX) is expanding into emerging markets, aggressively focusing on user engagement and tapping into advertisement and gaming. Netflix Inc (NASDAQ:NFLX) is also expanding into NFL games and WWE. Netflix’s ad-tier now has 40 million global monthly active users, up from 23 million in January.
Thanks to its aggressive focus on expansion, Netflix Inc’s (NASDAQ:NFLX) revenue stream has become extremely diversified, which can protect it from the headwinds at home. In 2023, Netflix Inc (NASDAQ:NFLX) raked in $14.9 billion revenue from US and Canada combined, while revenue from the EMEA region jumped 8% to $10.6 billion. Latin America and Asia-Pacific revenue came in at $4.4 billion and $3.8 billion.
Netflix Inc (NASDAQ:NFLX) added a whopping 9.3 million subscribers in the first quarter alone, a sign that its strategies are working. For context, Netflix Inc (NASDAQ:NFLX) had added 1.8 million subscribers in the prior-year quarter. The subscriber growth is expected to continue as Netflix Inc (NASDAQ:NFLX) focuses on user stratification and new content. Netflix Inc (NASDAQ:NFLX) is targeting original content spending of $17 billion by 2024.
RiverPark Large Growth Fund stated the following regarding Netflix, Inc. (NASDAQ:NFLX) in its first quarter 2024 investor letter:
“Netflix, Inc. (NASDAQ:NFLX): NFLX was a top contributor in 1Q24 following strong fourth quarter earnings and 2024 guidance driven by better-than-expected subscriber adds (+13.1 million versus estimates of +8.9 million). The company’s subscriber growth continued to accelerate following the company’s crack down on password sharing and the rollout of the lower cost, advertising supported subscriber offering known as the Ad Tier. ARPU came in below expectations, but recently announced price increases in the US, UK and France showed signs of moving ARPU higher. NFLX guided 2024 operating margins to 24%, ahead of prior guidance of 22-23%, and guided to 2024 free cash flow of $6 billion.
The recent re-acceleration of subscriber growth, plus price increases on premium memberships and a stabilization of content investments, should position the company for low double digit annual revenue growth over the next few years while driving improved operating margin to more than 25%. We also believe that the stabilization of content spend should allow the company to continue to scale its FCF.”
2. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
Venu Krishna of Barclays added Broadcom in his portfolio of stocks to offset tech concentration risks. While Broadcom Inc (NASDAQ:AVGO) is directly exposed to the AI semiconductor market, some believe the stock is priced for perfection, with a P/E multiple of 52 and YTD share price gain of 30%. In the first quarter Broadcom Inc (NASDAQ:AVGO) saw a 34% revenue growth, which surprised the Wall Street. However, adjusted earnings clocked in growth that was significantly less than revenues, indicating limited margins. Broadcom Inc’s (NASDAQ:AVGO) EV/EBITDA is 22.5, much higher than its five-year average of 14 and sector median of 14. Broadcom Inc’s (NASDAQ:AVGO) debt levels are also worrying for many. It has $73,429 million in long-term debt and $2,374 million in current debt. Broadcom Inc’s (NASDAQ:AVGO) revenue growth is expected to come in at 13% next year and 15.10% over the next five years on a per-annum basis. This means Broadcom Inc (NASDAQ:AVGO) is a laggard when compared to industry leaders like NVDA. The stock’s one-year average analyst price estimate set by Wall Street is $1533, representing an upside potential of just 9%.
Carillon Eagle Growth & Income Fund stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its first quarter 2024 investor letter:
Broadcom Inc. (NASDAQ:AVGO) continues to trade higher as a beneficiary of generative artificial intelligence (AI). Management recently highlighted that AI-related silicon now comprises a significant percentage of all semiconductor solution sales. The company also is focused on integrating its acquisition of VMware.
1. Salesforce Inc (NYSE:CRM)
Number of Hedge Fund Investors: 154
Barclays believes Salesforce Inc. (NYSE:CRM) is one of the stocks to offset tech concentration risks.
Mizuho Securities analyst Gregg Moskowitz thinks the company is still “well situated” to help customers in digital transformation. However, the analyst thinks Salesforce Inc. (NYSE:CRM) would do so prioritizing profitable growth. The analyst reiterated his Buy rating on the stock but cut his price target to $300 from $345.
Morgan Stanley analyst Keith Weiss, who has an Overweight rating and a $320 price target on Salesforce Inc. (NYSE:CRM), said that Salesforce’s PEG ratio of 1.2 shows the market is not pricing in operational discipline and earnings growth sustainability.
“We continue to view GenAI as a tailwind for Salesforce, with benefits likely coming in CY25, but at these levels, GenAI represents a call option.”
Salesforce Inc. (NYSE:CRM) is trading at 22x its fiscal 2026 earnings estimate of $10.99, which makes the stock attractively valued given the sector median P/E ratio of 23.85 and Salesforce’s AI growth catalysts. Salesforce Inc.’s (NYSE:CRM) revenue in fiscal 2026 is expected to grow at 9.10% while earnings are forecasted to rise by 11.00%.
Harding Loevner Global Equity Strategy stated the following regarding Salesforce, Inc. (NYSE:CRM) in its first quarter 2024 investor letter:
“Leading software companies have the advantage of high switching costs and the ability to incorporate new features into products customers already use. For example, Microsoft has added its Copilot chatbot functionality to everything from search (Bing Chat, recently renamed to just Copilot) to coding (GitHub Copilot) and workplace applications (Copilot for Microsoft 365). Software sold by Microsoft and other companies such as Salesforce, Inc. (NYSE:CRM), SAP, and ServiceNow are also already deeply integrated into their customers’ operations and workflow.
As large enterprises search for the right balance, Salesforce’s Data Cloud, a flagship offering, is designed to address a critical issue for them so they can make better use of AI tools. After a hectic buildout over the last few years of “data warehouses” and “data lakes”—two types of repositories for storing and processing data—across the various business units of large companies, many companies are left with what feels like islands of trapped data. Data Cloud solves this by creating a single platform to access and leverage all of an enterprise’s data, eliminating the need to constantly duplicate large amounts of information across different platforms. Users are then able to apply generative-AI technology, such as Salesforce’s Einstein tool, to a more comprehensive dataset, which enables them to better glean customers’ intentions, personalize marketing messages, and automate the processing of customer-service requests. As users build these systems, Einstein’s copiloting functionality helps their programmers work more efficiently so that IT departments with limited budgets and manpower can still develop the necessary tools. Salesforce’s management projects that revenue and earnings will climb about 9% and 45%, respectively, in fiscal 2025, citing the company’s operating leverage and cost discipline. We think these figures are achievable given the renewed focus on profitable growth, and so we added to the stock during the quarter.”
However, Salesforce Inc. (NYSE:CRM) skeptics believe the stock has run too much as its valuation is high. For value-conscious investors the market is indeed teeming with other opportunities. If you are looking for an AI stock that is as promising as Salesforce Inc. (NYSE:CRM) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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